Gracie Enterprises is a publicly traded firm. The firm has committed to a regular dividend to shareholders. The firm has declared a dividend for the next period of $2.50 per share. Similar companies are trading with a cost of equity capital of 12% per year. If the stock is trading at $27.78 then, according to the DDM, what growth rate must be assumed by analyst and investors?Group of answer choices9.56%3.00%12.35%7.56%

The Gordon Growth Model (also known as the Dividend Discount Model or DDM) is used to calculate the intrinsic value of a stock exclusive of current market conditions. The model assumes that dividends grow at a constant rate indefinitely. The formula is:

P = D / (k - g)

where: P = price of the stock today D = dividend expected in the next period k = cost of equity capital g = growth rate of dividends

In this case, we are given P ($27.78), D ($2.50), and k (12% or 0.12 as a decimal), and we are solving for g. Rearranging the formula to solve for g gives us:

g = k - (D / P)

Substituting the given values into the formula gives us:

g = 0.12 - ($2.50 /$27.78)

Calculating this gives us a growth rate of approximately 0.03 or 3%. So, according to the DDM, analysts and investors must assume a growth rate of 3%.

The Gordon Growth Model (also known as the Dividend Discount Model or DDM) is used to calculate the intrinsic value of a stock exclusive of current market conditions. The model assumes that dividends grow at a constant rate indefinitely. The formula is:

P = D / (k - g)

where: P = price of the stock today D = dividend expected in the next period k = cost of equity capital g = growth rate of dividends

In this case, we are asked to solve for g, the growth rate of dividends. Rearranging the formula to solve for g gives us:

g = k - (D / P)

Substituting the given values into the formula:

g = 0.12 - (2.5 / 27.78)

Calculating the above gives us:

g = 0.12 - 0.09 = 0.03 or 3%

So, according to the DDM, the growth rate assumed by analysts and investors must be 3%.